JIFFY LUBE INTERNATIONL

Mid Term Paper Strategic Management Professor David Duffil Robert Kennedy College June 8th 2008

Table of Contents
EXECUTIVE SUMMARY ...................................................................3 SITUATION ANALYSIS ....................................................................4 (1) Milestones/Challenges:................................................................................................................4 (2) SWOT Analysis ...........................................................................................................................6

Executive Summary The period starting from the late 1970s to the early 1990s have experienced phenomenal growth in the U.S Franchise market. An estimated 28,000 new franchise outlets were sold in 1991, compared to 13,960 sold in 1986 (Fortune 1991). By 1991, there were over 370,000 franchise outlets in the United States, accounting for between $200 billion (Bond 1989) and $700 billion (Fortune 1991) in annual sales. Jiffy Lube International (JLI) was launched in 1979 by the entrepreneur and exbasketball coach Jim Hindman, who had the right recipe for introducing the concept of quick lube change while you actually wait, Hindmans concept would later proof to be an eye opener for a whole market for quick related auto services as a franchise system . Supporting his mission of establishing 1000 JLI centers by 1991, Hindman has pursued the conventional franchise build up strategy model (figure 1). Rapid achievement of critical mass is crucial to the franchises successes and sustainability, matched by an operational and customer service focused formula. That philosophy has strongly dominated Hindmans priority list and JLI has been successful in reaching the targeted number of centers, however, that strategy lacked certain balance. Sitting on its first quarter losses in 1989 with depleting financial resources, JLI needs to review its overall position and strategy. Concerns about other issues such the ones related to best operational practices as well as compromising press customer services should be fully addressed.

Providing a unique product/ service Providing a unique customer service proposition Providing value for money Regional and national growth (multi unit operations) Increase Visibility and advertising Reasonable franchising and royalties fees

Benefit for Investors

Added Value for the End user

Franchise Value Model (Figure 1)

Situation Analysis The first step for developing a rebound strategy requires a deep analysis of the prevailing situation that addresses: JLI position in relation to its vision Industry and business Context changes Major internal and external conditions that could favor or limit growth and sustainability

(1) Milestones/Challenges: Year 1979 Milestones / Challenges Launch of JLI Launched objective of opening 100 units Pennzoil acquisition of 30% of JLI preferred stocks Decision to franchise Acquisition of Heritage Merchandising $28 Million Revenue Reached Announced goal for opening 1000 units by end of 1989 ADI rights distribution initiated Focus on expansion by way of unit clustering National advertising budget reached $8m Closure of a major S&L JLI financier NASDAQ IPO International expansion Zero defect initiative launched Posted $250 Million revenue Declining stock value by Daily car count/center averages 43 Bad press Financial constraints 4

1981 1982 1983 1984

1985 1986 1988

1989

Field force increased to 34 Posted first quarterly losses

(2) SWOT Analysis

Strengths A pop culture icon for auto service franchises Market leadership (1st in position) Unique offer Industry Leadership (3 times over next competitor) 1000 centers that include regional clusters Economies of Scale Highly driven entrepreneurship leadership

Weaknesses Drained financial resources Heavy reliance on debit financing Rapid Growth Heavy financial drain from owned outlets Inconsistent service quality High employee turnover

Opportunities Continued growth of the auto specialty service concepts Quick oil change concept expected to attract 40% of all oil change business Long warranties encourage auto owners to frequently service their vehicles

Threats Consumer paradigms need further reinforcement towards seeking frequent minor services ADI ownership lack of business sense in operation in lieu for more real state focus New entrants and competition Shift to fuel and oil efficiency

(3) JLIs Revenue Stream Franchising revenue; ADI sales, Standard and master licensing fees, Royalties Distribution ; Sales of equipments and supplys by Heritage Real State ; Rental Income Other ; Sale of own centers / Interests

(4) Major Revenue Drainers (a) Operation losses: Losses incurred from 81 own centers (pre- franchise); margins for companyowned centers went down to 1.2% in 1988 from 16.3% in 1986. Opportunity costs : Compromised revenue from discounted royalties and franchising fees mainly for conversions centers On the other hand, the increasing number of centers held for rehabilitation and sale/franchise from 21 in 1987 to, 81 in the first half of 989, is again a cause of major opportunity cost due to missed potential franchise system revenues.

(b)

(c)

Debit financing: The expansion through leveraging has begun to take its toll on JLIs overall accumulated liabilities. JLIs long-term liabilities account for 88% of total liabilities of $128.196. Notes Receivable from franchisees that have grown up to $22.534 million in 1989.

Hindmans strategy revisited Hindmans growth strategy up to the 1989 has been able to a great extend to provide most of the value drivers for potential franchisees. Lets review some the franchise business value drivers as outlined in a research made by Baucus, M. S., & Human, S. E and published by the Journal for of Small Business Management, Baucus, D. A.,. (1993): 1- Age of the franchise. In general, the longer a franchise has been in operation, the more secure the franchisee can feel about the likelihood of survival and success 2- Market representation Potential franchisees can also assess the value of a franchise based on its representation in state, national, and international markets. The value a franchisor provides to franchisees is closely tied to the reconcilability of the name brand and the consistency of products or services across retail outlets. 3- Growth in retail outlets. Another criterion potential franchisees use to evaluate the value of the franchise and future performance is recent growth (or decline) in the number of the franchisor's retail outlets. 4- Costs of providing Services .Base fees and royalties reflect the value of the franchise and the costs associated with running franchisee operations.

Turn Around and sustainability strategy 1- Capitalizing on critical mass It seems to me that Hindman understood the franchising game very well, and his growth and expansion strategy seems to be justified. His vision to achieve critical mass with his concept as soon as possible would safeguard JLI against influx of new entrants and would establish very strong brand equity. However, I can empathies with his drive to achieve the 1000 store, achieving that millstone at almost whatever cost could be fatal to the whole sustainibity drive. The emphasis therefore is to capitalize on the business environment that has been created by the 1000 stores which includes; brand recognition, reliable service and most importantly a continuously improving value for end users and franchisees. In other words, the stage is set for retooling and restrategizing all operational aspects. 8

2- Operational and financial consolidations Near Term; (a) (b) (c) (d) (e) Reposition own stores for immediate franchising by offering attractive sale or lease proposals. Reduce the number of own stores by selling remaining nonperforming and hopeless centers. Adopt a stringent accounts receivable policies while providing incentives for early fulfillments , Streamline and standardize operations by introducing internet based support network, implementing processes manuals detailing minimum acceptable standards and HR policies. Developing a highly motivated and sufficient DM network that would work hand in hand with all centers to evaluate performances, train staff , set specific stores targets , assist in developing local store marketing (LSM) and improve each centers revenue and profitability Improving and updating customer service models by introducing new initiatives that further improve end users engagement such as emailing services reminders and special offers as well as encouraging consumer feed back . Store enhancements to facilitate customer needs while waiting, including relaxing atmosphere, Internet Access, child play area, etc.

(f)

(g)

Long Term; (a) (b) (c) (d) Re design all franchising contracts and Increasing franchising and royalty fees Self funded National and International expansion Consider strategic alliances Replace blanket ADIs by professional mapping initiatives to determine more relevant site selection, as well as raising the bar for potential franchisees that are directly linked to JLIs franchise operation standards. Develop an ongoing and subtle PR campaign that engages JLI with environmental friendly initiatives at both the store and national levels. 9

(e)

Conclusion Hindmans reluctance to let go of the non-performing own centers could be empathized. Relinquishing visible franchise units could be viewed as failure in the industry. Having said that, Strategic management is about taking action today to achieve benefits in the future1 . What has been achieved so far is significant by franchising industry standards. Now, the first quarter results of 1988 should serve as a strong warning for Hindman to review the financial strategy, focus on consolidating the business, and embrace for a wave of recovery. That should include major strategy shift, not in terms of compromising growth but more in terms of how to finance this growth and how to enhance the bottom line at each centers level. JLIs strategic alliance with Pennzoil proved to be key, it is time to enhance this alliance or perhaps consider other alliance(s). Hindman needs to consider introducing a new mind set to provide innovation and financial backing to support further national and International expansion while enhancing JLIs value chain to its wide customer base including potential franchisees and vehicle owners.

H.Macmillan & M.Tampoe (2000) , Strategic Management , OUP , PP12

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References
Baucus, D. A., Baucus, M. S., & Human, S. E. (1993). Choosing a Franchise: How Base Fees and Royalties Relate to the Value of the Franchise. Journal of Small Business Management, 31(2), 91+

Castro Giovanni, G. J., Combs, J. G., & Justis, R. T. (2006). Shifting Imperatives: An Integrative View of Resource Scarcity and Agency Reasons for Franchising. Entrepreneurship: Theory and Practice, 30(1), 23+. Retrieved May 29, 2008

Jackson, L. A. (2002, November). When Jiffy's Not So Spiffy: What to Do When Your Car Needs Maintenance. Black Enterprise, 33, 165.

McCrea, B. (2001, September). Affordable Franchises. Black Enterprise, 32, 88. Retrieved May 29, 2008,

McGinnis, P. (2006). Tougher Challenges-And Leadership to Match: Public Servants Are Using Innovative Techniques to Get Better Results Quickly and Cost-Efficiently, Improving Workforce Performance and Spanning Organizational Boundaries to Effect Much-Needed Changes. The Public Manager, 35(1), 7+.

Michman, R. D., & Mazze, E. M. (2001). Specialty Retailers: Marketing Triumphs and Blunders. Westport, CT: Quorum Books. Retrieved May 29, 2008.

Pennzoil: Pennzoil-Quaker State Company Drives Supplier Diversity. (2002, June). Black Enterprise, 32, 274.

Sherman, A. J. (2004). Franchising and Licensing: Two Powerful Ways to Grow Your Business in Any Economy (third Ed.). New York: AMACOM. Retrieved May 29, 2008.

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